Hit or bust

EchoStar may have lost DirecTV to Rupert Murdoch

MICHAEL POWELL, head of America's Federal Communications Commission (FCC), did not mince his words when he blocked the $18 billion merger of EchoStar and Hughes, two big satellite-TV companies, on October 10th. This week, EchoStar made one final attempt to get its deal approved. But it now looks as if Charlie Ergen, the former professional blackjack player who founded EchoStar from the back of his pick-up truck, may have finally bust his hand.

Curiously, the FCC's objections are based entirely on the merger's likely impact on competition. Mr Ergen had presumed, not unreasonably, that competition-policy matters were being looked after by the competition guardians in the Department of Justice's antitrust division, which has also been reviewing the merger. He also presumed that Justice Department officials would make their ruling first, as that is the way it had worked in the past. Wrong again: like his father, Colin Powell, America's secretary of state, Mr Powell junior seems to pursue a doctrine of pre-emption. Despite last-minute appeals from EchoStar and Hughes, the FCC made its antitrust ruling (based, meticulously, on Justice guidelines) before Justice Department officials even had a chance to mutter “Herfindahl Hirschman Index”.

Neither EchoStar nor Hughes would comment on the plan Mr Ergen brought to a meeting with the Justice Department on October 28th. But it was inspired by an idea floated at the FCC earlier this year by Cablevision, a second-tier cable-TV operator that had sniffed a serious opportunity. The merger of EchoStar and Hughes, which owns DirecTV, the biggest satellite-TV service, would shrink the number of satellite-TV operators in America from two to one. The plan was to turn Cablevision into a satellite-TV company, and take the number from one to two again.

According to Cablevision's version of this plan, which it leaked this week, EchoStar and Hughes would go to amazing lengths to help their new competitor, willingly handing over satellites, distribution and management expertise. Securing finance for the new venture, to be called Rainbow Direct Broadcast, might be a problem: like other cable-TV firms, Cablevision lugs around terrifying amounts of debt. But, notes Ford Cavallari of Adventis, a consultancy, Cablevision does have peripheral assets that it could sell for cash.

Although the Cablevision start-up would be competing against a company starting with nearly 100% of the satellite-TV business, it would have several advantages over the merged EchoStar, says Harold Furchtgott-Roth, a former FCC commissioner who has been helping Cablevision with its plans. As a new company, it could introduce the latest satellite technologies immediately, including smaller dishes, smarter set-top boxes, and new services, such as high-definition TV. EchoStar's and DirecTV's customers are stuck, for now, with old equipment. Also, says Mr Furchtgott-Roth, it would take years for the benefits of the EchoStar merger to show up, as the two companies gradually replaced two sorts of set-top boxes with one.

On the face of it, the idea went some way towards satisfying Mr Powell's concerns. But the FCC's language and its ruling were notably harsh. Mr Powell even pushed the bizarre argument that cable and satellite TV belong to entirely different markets, which is hard to square with reality—or the way the FCC has looked at things in the past. Now it seems that the Justice Department may have decided to play it safe and toe the FCC line.

Rightly or wrongly, people spot more at work at the FCC than antitrust economics. One charge that Mr Powell faces from his critics is that he is a bit of a ditherer. Perhaps he feels the need to act tough on something. A darker explanation points to the hidden hand of Rupert Murdoch, a seasoned Washington campaigner who lost out to Mr Ergen when Hughes's main shareholder, General Motors, put it on the block last year. As Mr Ergen has tussled with the regulators, Mr Murdoch's News Corporation has been quietly husbanding its cash. Failure for Mr Ergen leaves Mr Murdoch holding all the cards.